Greenwich expects the MPC to retain MPR and CRR at Jan 2016 meeting

Monday, January 25, 2016 10.27 AM / Greenwich Research The Monetary Policy Committee (MPC) of the Central Bank of Nigeria will be holding its first bi-monthly meeting for the 2016 fiscal year on the 25th and 26th of January. In line with the review of the developments in the global and domestic economy, we believe the committee will place more emphasis on:

•The delicate state of the domestic equity and fixed income market

•Rising inflationary pressure

•Declining Federal Revenue and GDP growth

•Pressure on foreign reserves and exchange rates

We envisage that after extensive deliberations the committee will:

•Retain the monetary policy rate (MPR) at 11.0%;

•Retain the CRR at 20%; and

•Retain the asymmetric corridor of +200bps and -700bp.

Despite the growing pressure, the CBN has managed to keep the Naira pegged between ₦198/US$ and ₦199/US$. However, the apex bank is faced with the choice between a sustained reserve depletion of <5% (with reserves currently at US$28.4bn) and a mild devaluation of the Naira in the near to medium term.

According to speculators, the domestic currency at the parallel market dropped to a record low of ₦305/US$, however, the new policy implemented by the apex bank failed to drive up the currency.

It has never been in dispute that Nigeria relies on oil for more than 90% of export earnings, and low energy prices have created significant deficits in revenue projections for H2 2015 and FY 2016. The CBN actually allowed the Naira to weaken in 2015, though not fully adjusted to oil prices that reached a 12 year low of US$27 per barrel in 2016.

The CBN also imposed tight FX restrictions, which have forced importers buying certain goods to use the parallel rate offered at Bureau de changes (BDC) and banned consumers from using debit cards abroad.

Although the apex banks intentions were geared toward improving domestic capacity in key sectors, the restrictions have stifled growth by slowing cross-border trade and preventing local firms from importing crucial inputs that are not readily available domestically.

It is also important to note the link between the Naira/US$ exchange rate and petrol (PMS) subsidies. Recall that the 2015 appropriation bill only built-in N458bn for PMS subsidies, hence, the request from the Presidency for N413bn as supplementary budget in November 2015. These funds were used to plug the subsidy deficit in view of the resulting scarcity of the product during the period.

The continuation of the policy regime will only reduce the CBNs ability to defend the currency and ultimately increase governments borrowing. That said, a total removal of subsidies will buy the Federal Government some time; albeit minute, to fully evaluate the efficacy of its restrictive policies with the flip side of aggravating the polity and losing popularity.

Consensus forecasts suggest that the decision for devaluation has already been made and only the magnitude would be deliberated on (US$1/N230 or US$1/N250 etc.).

Greenwich research however reiterates its view that “devaluation alone” only prolongs the issue, rather addressing the hydra aka BDC that has fed off the arbitrage between domestic FX market segments should take center stage.

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